Real Issues. Real Answers. Managing business peaks and valleys

The old saw, “You got to dance with them what brung you,” is a nice sentiment, but how valid is it in our business? More to the point, if your primary customer base of custom builders and remodelers supports business growth of 5% per year, but serving production builders instead could boost sales by 20% or more, what’s the smart business decision? The obvious answer of serving both customer segments sounds appealing, but the reality of limited resources gets in the way. When business is good, like it is today, a dealer sometimes has to choose between customer segments.

This month’s question came from a dealer in the Pacific Northwest, whose company is wrestling with the wisdom of turning away business from its core customers of small builders in order to focus its energies on high-volume, low margin production builders. There are definite pros and cons to each—but the real challenge is navigating the path back to the low volume customers when housing cycles away from the high-volume production builders.

As we do each month, we sent a brief email survey to our opt-in subscriber list. A big thank you to the readers who took a few minutes away from this strong market to share their insights into this issue. If you don’t get our emails, and would like to participate in future Real Issues surveys, please drop me a note at Rick@LBMJournal.com, and I’ll make sure we get you added.

Question 1

Please rank your customer categories based on their sales volume today (2017), compared to their sales volume during the low point of the recession (2009-2010).

As the graph confirms, small custom builders, mid-size builders and remodelers are the bread-and-butter customers, in good times and bad, for the majority of LBM Journal readers. Since production and multi-family builders took the biggest hit during the recession, it is not surprising their shareof- sales was the smallest during 2009- 2010. The fact that respondents report that their share-of-sales to those two segments is growing—at the expense of remodelers and small custom builders— implies that some dealers are opting to swap some typically higher-margin small customers for low-margin large ones. The mid-size builder category is not only maintaining, but growing its share-of-sales slightly. Clearly, this Real Issue is a valid question in today’s market.

Question 2

How would you answer this question from a fellow LBM dealer about choosing which customers to serve? “My business challenge revolves around large production builders vs mid-sized and smaller custom home builders. Pre-recession, our company focused intensely on large volume/low margin builders. Coming out of the recession, our company—along with others who took a similar approach— came back to smaller builders, hat in hand, humbly asking for a shot at their business. “Today, I’m seeing some large volume builders outpacing pre-recession numbers. Serving them stretches our resources, and can literally force us to tell some smaller builders that they’ll have to look elsewhere. This will come back to bite us, as it has in the past. My question is this: how do other yards identify this dilemma ahead of time, prevent it from happening, and deal with it effectively?”

Responses

“Understand your resources and those who will use/abuse them. Identify your maximum ROI potential per individual customer to identify the customer type you want to attract. Our experience indicates that doing a smaller overall volume of business with the small and medium guys provides a better longterm return than doing much more with the production guys who are more likely to stick you than stick with you.”

“In our particular case, our focus has always been on remodelers and custom home builders, and we’ve never gone after either the production or multifamily builders. That approach helped us navigate the recession both on the way down and on the way back up. So, our advice would be to not let the dilemma happen in the first place.”

“Make a plan and stick to it. Don’t be sucked into high dollars of production with their low margin results.”

“My company was not affected by the 2009-2010 recession. We actually grew during that time, we do not deal with large production builders. We are stable with a multi-family Builder and our small custom builders.”

“You have to take care of the custom builder. He will stick with you unless you give him a reason to leave (drop in service or non-competitive prices). The large volume builder has no loyalty.”

“We no longer sell the production builders.”

“Crunch the numbers, equipment utilization and people utilization. Are you generating enough profit to support the growth initiatives you have planned for the future?”

“We don’t have any large production builders so it hasn’t been a problem for us.”

“My hunch is that large volume builders will start to slow despite what the media and the numbers say. Looking at housing from a more macro vantage point, it is clear that millennials will start to head to the suburbs to raise children, leaving all the large multifamily dwellings vacant or with significantly lower rental rates and much more availability. Either way, I think once the baby-boomers realize the need to drop their home price in order to sell to the millennial, a huge generational transformation will begin.

“Millennials just don’t have the down payment necessary to get into a home valued at $400,000, but they can brag about the $100,000 they have in their retirement fund. As long as banks maintain record low interest rates on savings accounts, people will continue to put their money in the place with the highest return…401k. How long will it take for this transformation to begin, I don’t know, but eventually the boomers will have to get out of these high tax areas before their own retirement funds go completely to property taxes or the deed to their house ends up in the hands of a nursing home.

“To answer the question, I think now is the time to concentrate on the smaller builder and the renovation contractors. All the boomer houses need work and will be changing hands soon. I think the cliff for large volume builders is on the horizon and the vacancy rate of suburban houses will be unprecedented, which will create deals that millennials won’t be able to resist.”

“Being in a relatively small market, we have to make certain that we satisfy the needs of our bread and butter customers. Just because we start to see some activity with production builders doesn’t justify selling the farm, so to speak, by lowering our quality/price standards to satisfy this segment of business. Perhaps it is best to maintain a dual inventory in specific lengths only of upper grades and standard and better dimensional framing. Does it ever make sense to try and be all things to all customers?”

“We don’t deal with any single-family builders—not worth the trouble.”

“It’s difficult to be everything to everybody. Try to emphasize the need to plan ahead and work together to get the orders delivered timely. Definitely can’t afford to chase away the smaller customers. Lose your big one and you have nothing but a face full of crow.”

“Listen to all venders, and always ask, ‘Is there something going on that I need to know?’”

“We don’t really have that problem here in rural Iowa. We don’t focus much attention on large production builders because there aren’t any.”

“The owners / senior leadership team should do a deep dive into the customer profitability of these segments looking at a segment analysis, both five-year pre-recession and five-year postrecession. Once good data points are arrived at (a thorough net return of the customer segments and the profitability to the LBM dealer are understood to include the DSO (days sales outstanding) of each, and an honest determination of the credit and leadership costs associated with both), the lead team can do a strategic visioning process.

“In this quality improvement process (Six Sigma or other strategic initiatives can be set on where the business wants to be in 3-5 years); the leaders can determine the business mix of builders that gives them optimum utilization of all their resources (operational, financial, account management costs, and management costs). Next steps would be to assign ownership (key team members accountable to change needed); establish key dates for tactics necessary to meet the 3-5 year business changes needed to maximize the efficiency and profitability of the business. Meet quarterly and annually to ensure action and changes are being made, check in and continue forward progress to the agreed upon optimum mix between the builder segments. Use (build) a score card and compensation model that supports the strategic changes for all key stake holders (sales, credit, operations, leadership) and reap the rewards of the new model through any business cycle.”

“Consistency, volume and profit are key factors to evaluate. Sales numbers are one thing, but are they consistent? Is it regular volume? And what is our profit margin? Margin is what matters. If we have huge volume and consistency from large volume builders but little profit, we have to weigh that against smaller builders with greater profit. Look at profit margins and work off of those. The numbers don’t lie, and make decisions for the future simple from a business standpoint. After all, who wants to do a ton of high maintenance business but make hardly anything?”

“We have always focused on the small to mid-sized builders, that is where our bread and butter is at. Take care of the customers who will be there through thick and thin.”

“It’s a balancing act because you have to sell the large volume customers at a slightly higher level than one would expect. The volume builder has to be more organized than the small builder or you’ll lose your shirt, pants and everything else. If you can’t get the volume builder organized, then you shouldn’t attempt to sell them! It has to be on your terms, with you demonstrating your value by helping them get organized. If they’re not willing to pay your price, then walk.”

“We have opted not to pursue the lowmargin accounts no matter the market conditions, good or bad. We gladly sell them their emergency and pick up items—on our terms and at our pricing. Our business model is to maintain healthy and profitable relationships with consistent, reliable service to the mid to small custom builders and remodelers.”

“At a time when everyone is very busy, this ‘dilemma’ doesn’t seem very important to me.”

“Know your market and know your limits.”

“Large production brings large returns, but the small guys will always be there making them a valuable asset.”

“Our company went down this road with production builders before the recession. In order to service their highvolume, low margin business, something had to give. That ‘something’ was our remodeler business. After all, they were small companies with low volume and they required a lot of attention. The margins were good, but we decided that our company’s future would be more solid and secure by establishing ourselves as the LBM vendor of choice for the big production builders. “When the recession hit, and the big production builders went dark for several years, we were stuck. We needed our old remodeler customers back…so we went back, hat in hand, and began the courting process all over again. Their very valid question to us was, ‘You turned away our business once before—which was disruptive to us and our homeowner customers. After you did that to us once, why should we put our trust in you again?’ It was a good question, and we’d been asking ourselves the same thing. “We apologized, and owned our mistake. We learned our lesson, and requested the opportunity to re-earn their trust. Some said yes, some said no. But we did learn our lesson. If we can service production builders without sacrificing our established, loyal customers, we’ll do it. If not, they can keep shopping.”

“Never pass up business. Find a way to service all accounts, no matter how big or small. Today’s small builder could be the ‘Next Big Thing’.”

“The large regional yards should continue to go after the production builders and forget the small and custom builders. Leave this undesirable segment to the small yards.”

“We are trying to focus on maintaining margin post-recession. Our small to midsized customers are right in our wheel house and the larger production builders are not. For now we have let that business go to other yards. We haven’t increased our staff to pre-recession levels either, so we are profitably operating at a lower sales level.”

“Remember the old adage, ‘You can’t be all things to all people.’ Business people realize that patterns and trends within our industry change regularly. Now that we’re operating at full capacity, we may have to stop servicing smaller builders in order to protect their business as well as ours. If we can’t be a full-service supplier to them, we’d be doing a great disservice to them. Be sure to thank them for their loyalty. Tell them how important they’ve been and are to us. Tell them that we’ll do everything in our power to re-examine, or re-evaluate our policies and procedures, to see if we can once again, service them in the way that they deserve to be.”

“We make sure the pricing is giving us an even return on all projects when considering the volume. We make sure we are able to take care of our main base first. Like grandma always said, ‘you have to dance with the one who brought you’.”

“Large volume just doesn’t happen in our retail area. We have to sell to all.”

“Large volume builders usually require low pricing. I would concentrate on remodelers and small custom home builders that you can get good high margins for. They require more service and more deliveries but will pay higher prices. These builders would offset the low margins of the large volume builders. You also must probably raise your credit limits with your suppliers if possible. The problem you run into then is if they don’t pay you on time, your suppliers might cut you off.”

The reader who suggested the “Real Issues” topic will receive an LBM Journal executive prize pack. Includes: a polo shirt (we’ll contact you for size), corkscrew, cap, mug, and pen.